Early indicators are that Apple Inc. (NASDAQ:AAPL) has a hit on its hands with the iPhone X. Combined with its Q4 earnings, the double dose of good news has meant AAPL stock continues its climb. However, Apple investors will have even more to celebrate next quarter, when the new iPhone’s sales are included in AAPL numbers. A report suggests the iPhone X profit margin is higher than that of the iPhone 8, despite costlier components.
That $999 price tag is not scaring off potential buyers and it’s helping pad Apple’s bottom line, which will be good news for AAPL stock.
iPhone X BOM Revealed
Since the new flagship iPhone’s release last Friday, third party teardowns have begun. These are a yearly ritual that not only expose specifications AAPL doesn’t officially release — like the amount of RAM in a smartphone — but also give insight into Apple’s cost. When each component is known, a bill of materials (BOM) can be put together that provides an accurate cost for each iPhone.
And since we already know its selling price, the two numbers provide a pretty good idea of the profit margin Apple is making for its smartphones.
The numbers are now in for the iPhone X BOM, which is estimated at $357.50 for the base model. That would equate to an iPhone X profit margin of 64%. In contrast the iPhone 8’s margin is estimated at 59%. That’s despite some very expensive components in the iPhone X, including the new OLED display that’s worth $65.50 (compared to $36 for the iPhone 8’s LCD display).
The numbers are based purely on the BOM cost for each iPhone, and don’t include additional factors like manufacturing expenses, research and development and marketing costs.
How Does AAPL’s iPhone X Profit Compare to Previous Models?
As mentioned, the iPhone 8 has an estimated profit margin of 59%, but how do AAPL’s estimated iPhone X profit numbers compare to previous generations of iPhones? There’s some good news and some bad news on that front.
At 64%, the iPhone X profit margin is definitely higher than the original. Ten years after Apple released its first smartphone, its iPhone profit margin has increased from an estimated 55% to 64%. That sounds pretty good, but in between those bookend years, AAPL has done better. For example, the iPhone 5, iPhone 5s and iPhone 6 all offered estimated 69% margins. So, good, but still not at the levels Apple once hit.
Compared to the Smartphone Competition?
Between them, Apple and Samsung Electronics have a virtual lock on global smartphone profits, with the lion’s share going to Apple. That pretty much says it all. Samsung’s Galaxy S8 is estimated to have a profit margin of about 58% based on its BOM. Last year’s Google Pixel XL from Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) was hitting around 63% margins based on BOM.
What Does This Mean for AAPL Stock?
All of these BOM numbers are estimates. And Apple has long been critical of using this method to calculate profitability, particularly in its lack of accounting for variables such as marketing costs and hidden manufacturing costs like patent royalties. However, they are useful for getting a general idea of how much money the company makes per iPhone and just as importantly — because the same BOM calculations are applied across the board — they provide a valuable comparative tool. In other words, we have a very good idea of how iPhone X profit margins compare to the iPhone 8, previous models and to competing smartphones.
Apple’s iPhone profit margins have remained high throughout the product’s 10-year history, but they’ve been under pressure in recent years. Competition in the flagship smartphone market has meant more expensive components like bigger displays, with pressure to keep prices at the traditional levels. That has hurt Apple’s iPhone profit margin.
But with the iPhone X, the company had no real entry level price constraints. It has the iPhone 8 for consumers who don’t want to shell out $999 or more. That gave the company some leeway to boost that price tag and despite higher component costs, crank up the iPhone X profit margin to get closer to historical levels. And since the iPhone X appears to be a hot seller, those higher margins-per-unit are going to come into play in AAPL’s next quarterly earnings report. Which in turn, will be reflected in AAPL stock.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.